Succession Planning

In Tudor England it was a very bad idea to discuss succession planning – in royal circles at least. Nowadays succession planning is not just allowed, but is a remarkably good idea for farmers and landowners.

To discuss the succession of a monarch was to confirm the mortality of kings (and queens), and that was treason. Chatting about the succession of, say, Elizabeth I could lead you to the executioner’s block.

What is Succession Planning?

Nowadays succession planning is not just allowed, but is a remarkably good idea for farmers and landowners in particular, who wish to see their estates stay in the family – and avoid assets having to be sold to pay the taxman. Surprisingly, not enough people do it, and when they do it without the help of an expert, harsh words can be spoken and metaphorical fur can fly.

Why is Succession Planning important?

In farming and land ownership – more so than in any other industry nowadays – generation often follows generation; assets are handed down from parents to the next generation. It has always been so, but times have changed, primogeniture is not always the assumed and natural route of succession, and the taxman is always standing in the wings rubbing his hands together.

It can be the most difficult issue for families to face, but if a family can’t agree how to pass on their assets to the next generation fairly, the consequences can be dreadful. You can get huge family fall-outs, or the estate can suffer crippling taxation and a subsequent forced disposal of assets – or both. Not sitting down and discussing the issue is in no one’s interest.

The most important point to make is that it is never too soon to be talking about a generational shift of responsibilities and ownership, even if that may be a generation away. The discussions may take place on and off, and may proceed over a couple of years; it’s a serious question, and people need to think over their futures and further discuss them. Not everything needs to be done at once, so long as there is no imminent crisis. Careful, thoughtful steps and steady progress can benefit all parties.

Also, there is no substitute for having a third party, in effect chairing the discussions; bringing their long experience into play, and advising on all the technical and legal ramifications of all proposals and decisions. That is our role.

The early stages of Succession Planning

The first step is to talk to all parties individually and find out what they want to achieve, what they really want in life, and what their hopes and fears are. It’s a question of building up a mental jigsaw, but one needs to create the pieces first, before they can be slotted into the right places.

An awful lot of information comes out of those initial, informal chats. Most often the older generation isn’t making demands, but – quite the reverse – don’t want to impose on their children. People can say things which they might not want to say in front of other family members – or simply bounce ideas around the room.

Some fundamental markers can then be put in place, with answers to questions such as; who is/are the primary successor(s), does the older generation want to retire – fully or partly, where do they want to live and what do they want to be doing, what income do they need, who amongst the siblings would ideally do what, what might be equitable between them, and indeed do they want to continue the business or would they prefer to retain the assets but put in a manager or management team?

Even in very close-knit families people make assumptions about their loved ones which can be completely wrong.

The other point about using an expert third party is that – not to gloss the point – the principals can be rude about him or her when they’ve left.

And the family can be scathing about suggestions put forward, without falling out with each other – and yet then be able to mull them over and come back to them.

Our role in Succession Planning

The external expert’s role is often as a mediator; an ‘honest broker’, and – if necessary – the whipping boy. Someone has to break the ice and ask the awkward questions.

Every case is unique, and thus the answers are never the same. Batcheller Monkhouse handled a case recently where an arable farmer wanted to retire and split the assets and responsibilities between his three sons. A solution which met everyone’s ambitions was for one son to take on the arable farm itself, a second played to his strengths by managing the property arm, and for the third – who is passionate about outdoors sports – a now very-worthwhile mountain biking business was created in the estate woodland. Thus the estate is preserved intact, all three brothers remain share-holders of the holding company, and the father has retired, delighted that his legacy is both preserved and prospering.

Sweat Equity

What of the son or daughter who remains at home, farming with his parents, whilst his siblings build careers of their own elsewhere? If the farm is to be given equally to all siblings on their parents’ death, is it fair that the person who stayed behind should not have his efforts rewarded fully? Worse still the family may be faced with the dilemma that the only way to divide the inheritance is to sell the family farm. From this dilemma has grown the principle of Sweat Equity.

The sibling who remains and works on the farm in effect builds up equity in the farm in proportion to the difference between their actual salary or drawings and the commercial salary that might otherwise have to be paid to a third party. Trying to agree that figure retrospectively, following the death of a father or mother, is almost always very difficult indeed.

If only one person can sign the cheques and he or she becomes incapacitated the whole business can draw to a halt very quickly, which is both very frustrating and commercially very dangerous.

Once an outline plan has been put in place there is a need to deal with all the technical issues, and of course taxation is right at the top of the list. You can create a wonderful strategy but if the tax situation doesn’t add up then the heirs may well have to sell the assets, and that can be catastrophic. The taxable assets will fall into a number of different categories. The status of the land is one question, and is usually fairly straightforward. More difficult is the position with regard to the main house; without any planning, inheriting a £1,000,000 farmhouse could come with a £400,000 bill from the taxman. Few people can pay sums of that size without re-mortgaging or disposing of assets – and with planning they shouldn’t need to.

Usually farms and estates have one principal house, and surprisingly often the older generation are all too keen to move out of it and see their children (and grandchildren) using it as a family home. Taking a longer view allows such assets to pass between generations, and other homes to be built, converted, or bought – and perhaps be rented out, to generate income, until they are actually required. On the other hand, if the older generation wants to remain in the principal house for the rest of their life then we must be able to argue that they are actively involved in the running of the farm.

Farmers and landowners might not want to talk about succession planning because they fear a lack of flexibility and freedom of movement in the future, but no agreement can be set in stone. Life goes on; there will be changes in ambition or circumstances, people will get married (and divorced), children may well be born into the family, and indeed there may be early deaths.

Time to Act

At the moment the tax and inheritance regime in this country is relatively benign, but of course that could change, indeed there was a worrying consultation paper on APR only the other day. We have seen more aggressive policies towards farming, land ownership and inheritance in the past, and we may see them again. Retrospective legislation is quite rightly very rare, and it’s another reason why plans should be agreed and actioned now.

Succession planning need not be complex or expensive – indeed too much complexity is a bad thing – but stopping and considering the subject is always far better than inertia and the sooner the better.